Earnings Call
Dutch Bros Inc. (BROS)
Earnings Call Transcript - BROS Q4 2022
Operator, Operator
Greetings, and welcome to the Dutch Bros Fourth Quarter 2022 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paddy Warren. Please go ahead.
Paddy Warren, Host
Good afternoon, and welcome. I'm joined today by Joth Ricci, CEO; and Charley Jemley, CFO. We issued our earnings press release for the fourth quarter and year-end December 31, 2022, after the market closed today. The earnings press release, along with the supplemental information deck, have also now been posted on our Investor Relations website at investors.dutchbros.com. Please be aware that all statements in our prepared remarks and in response to your questions, other than those of historical fact are forward-looking statements and are subject to risks, uncertainty and assumptions that may cause actual results to differ materially. They are qualified by the cautionary statements in our earnings press release and the risk factors in our latest SEC filings, including our most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q. We assume no obligation to update any forward-looking statements. We will also reference non-GAAP financial measures on today's call. As a reminder, non-GAAP financial measures are neither substitutes for or superior to measures that are prepared under GAAP. Please review the reconciliations of non-GAAP measures to comparable GAAP results in our earnings press release. With that, I would now like to turn the call over to Joth.
Joth Ricci, CEO
Thank you, Paddy. Good afternoon, everyone. We appreciate your continued interest in Dutch Bros. In 2022, we delivered another year of growth with 133 new shop openings systemwide, a testament to our team's ability to execute our proven strategy. Despite the well-documented economic disruption, we've exceeded our new shop development targets for the third consecutive year and have now doubled our shop count since March of 2019. Although we continue to see signs of broader economic uncertainty, we entered 2023 well positioned to continue building market share and execute against our long-term goal of 4,000 shops over the next 10 to 15 years. As we look forward, I'd like to share a few points that underscore why we feel confident in our long-term positioning. Our drive-through model is focused on speed, quality and service. Our goal is to be the highlight of our customers' day, which we believe helps to cultivate lasting relationships. More than 95% of our sales are beverages, which we believe leads to more daily repetition than if we were serving food. We enjoy high average unit volumes (AUVs) without the supply chain and operational complexity of a restaurant, and our menu evolves to consumer preferences. More than 80% of our beverages are cold, which enables high levels of customization and can service several dayparts. We are particularly excited about the category growth of energy drinks and encouraged by our positioning within this competitive market. We have now opened at least 30 systemwide shops in each of the last six quarters, demonstrating the strength of our people systems and development pipeline. In 2023, we are targeting 150 new shops, which positions us to achieve our five-year goal of 800 systemwide shops by year-end. We will be within striking distance of $1 billion in revenue in 2023 and 1,000 systemwide shops by the first half of 2025. This inspires us and excites us. We know this growth creates jobs and opportunities for our employees and the communities we serve. Our new shops continue to be efficient, demonstrating predictable and attractive shop-level economics, and they mature quickly. The group of shops opened in 2019, 2020, and 2021 are approaching our 30% year-two contribution margin target and the class of 2022 is maturing in line with our expectations. We are hitting these targets while we continue entering new trade zones across the country. This performance gives us confidence in Dutch Bros' growth strategy both in the near term and beyond. That said, we enter 2023 with opportunities to optimize our operations. We're rolling out a beverage tap system, which we believe will achieve both supply-chain and beverage build efficiencies. We're also eyeing the further penetration of our Dutch Rewards and Dutch Pass programs. Here are a few updates on the five key objectives we shared as we started our public company journey. One was to continue to attract and develop people who are growth capital; two was to open new shops wherever people want great beverages with an eye on 4,000 shops in the next 10 to 15 years; three is to increase brand awareness and encourage deeper customer engagement; four was to invest in and use technology to improve the customer experience; and five is to expand consolidated margins through operating leverage. Let's focus on our people. Earlier this month, we welcomed Christine Barone as our new President. We are thrilled she is on board and already getting up to speed. Christine will be instrumental as we take this business to the next level. In Q4, our shop-level and management turnover remained below industry averages and our shops were fully staffed. Shop-level turnover improved about 3% quarter-over-quarter and it sits in the mid-70% range. Shop manager turnover remains in the low double-digits and operator turnover was once again virtually non-existent. We know employee satisfaction takes on many aspects beyond wages. However, we strive to ensure take-home pay is competitive. In Q4, we increased wages in select markets, and on January 1, 2023, we made a proactive investment in our people and increased wages across all jurisdictions that rely upon the federal minimum wage as their standard. Across all markets, we continue to have a strong applicant pool with far more people interested in working with Dutch Bros than available employment opportunities. To be clear, our investment in wages in 2023 is proactive, not reactive. Dutch Bros utilizes a growth-from-within model. In 2022, we promoted more than 2,500 people in the field, up from 1,700 in 2021. These promotions create compelling opportunities for our people across our organization. This growth in continuity in our ranks allows us to scale our culture and consistently deliver our unique brand of customer service as we enter into new markets. To help manage our people development, we maintain a qualified operator candidate pipeline to match internal candidates with growth opportunities as operators. Last year we had about 200 qualified operator candidates in this pipeline and we promoted 34 new operators from this list. The qualified candidate list has now grown to more than 275 individuals, demonstrating that our people pipeline is well ahead of our needs. Having such a deep bench is encouraging, especially as we look forward to another expected record year of unit growth in 2023. Now to shop development. In 2019, we began accelerating the company-operated growth model with a deliberate expansion outside the Pacific Northwest. We continue to be pleased with new shop performance; the AUV for our mature shops opened since 2019 is $2.1 million, approximately 25% higher than for shops opened in 2018 and prior. Since 2019, we have executed a variety of new market interest strategies, including fortressing. Our fortressing strategy allows us to saturate the market, entering quickly and going deep to develop scale. Going deep helps us manage the considerable demand we often see when we enter a new market. If we do not manage this demand skillfully, we risk allowing long lines to disrupt our customer and crew experience. Making sure our customers can efficiently and predictably navigate our lines is key to Dutch Bros' long-term success. In 2022, we executed our fortressing strategy and about 70% of our new shops were infill, most notably in Texas. We believe the Texas market is a key long-term growth driver for Dutch Bros. Over the last 24 months, we have opened almost 100 locations in Texas, creating adequate supply to satisfy the long-term demand as we build our powerhouse brand in the Lone Star State. For 2022, openings' annualized weekly sales were $1.8 million. This falls in our sweet spot balancing volume and customer experience considerations. We remain confident in new shop AUVs as we continue to expand into Texas and the Southwest and Southeast. In 2023 and beyond, we plan to continue utilizing both deep and wide development strategies as we craft our holistic portfolio. This balance helps us saturate markets and positions us to capture a large market share while quickly moving into new territories implanting the Dutch Bros' flag. In 2023, we look forward to entering Alabama and Kentucky. This morning, we announced changes to our Dutch Rewards program. By almost all metrics, this program has been an unqualified success. Beginning on or after March 27, each dollar spent at Dutch Bros will result in rewards members earning three points instead of the current five points. This adjustment should help us better align redemptions with current pricing levels and ensure the long-term health of the program. The changes preserve the value of customer points earned to date. We are not changing the amount of points required to redeem a complementary beverage. Instead, given the rise in menu prices in the past 18 months, we are adjusting the go-forward points earning rate. We believe those moves should create some headroom, enabling us to provide more targeted and customized offers to loyal customers while allowing us to better focus on key initiatives. Our Dutch Rewards program continues to grow as well. In Q4, approximately 64% of our transactions came from Dutch Rewards members. We believe there is a runway to expand this program, especially in newer shops. Our shops opened since 2019 have about 5% lower rewards penetration compared to our shops opened before 2019. In 2023, we plan to continue promoting the benefits of pre-loading funds and paying through the app. From an operational perspective, this is great for customers as it helps speed up line time. In Q4, we executed promotion to encourage users to load funds, which doubled the daily average of loads. We look forward to implementing similar promotions going forward to introduce more customers to the ease and simplicity of paying in our Dutch Rewards App. Additionally, we are excited to announce the launch of the Dutch Bros' creative collective, a leading-edge grassroots effort that empowers our employees to capture the best growth story. The creative collective allows us to move away from relying on models and agencies and instead partner with baristas to create social media and marketing content, so our brand continues to show up in a very authentic way. Our employees have always been a true source of our marketing power by providing incredible experiences at the window and reinforcing our unique culture. This program puts them in the driver's seat, while creating compelling features for talented creators in our system. Now let's talk about technology. We are investing in technology to improve both barista and customer experiences. In Q3, we added functionality for Dutch Pass users to share rewards in the form of free drinks. In Q4, we launched digital gift cards so our Rewards members can share the good vibes and treat their friends and loved ones to Dutch Bros. In 2023, we look forward to implementing systems that enable us to move faster, make better decisions and remove non-value-added tasks. Finally, we are committed to expanding margins over time through operating leverage. In Q4, we saw 940 basis points year-over-year contribution margin expansion in our company-operated shops, increasing to 28.5%. Operational improvements and pricing contributed to this year-over-year increase. Charley will provide additional details in his comments, as the portion of this margin improvement is related to our initial breakage estimate booked in Q4. Furthermore, in Q4, adjusted G&A was 19% of total revenue, a 120 basis points improvement from Q4 last year. We expect G&A leverage to continue in 2023 and beyond as our revenue growth outpaces the G&A investments we need to support rapid growth and scale our business. As we complete our first full calendar year as a public company, we are encouraged by the acceptance of our new shops as we expand eastward. Our people systems are strong and our 2023 development pipeline is fully loaded. We saw a meaningful company-operated shop contribution margin expansion in Q4 and continued G&A leverage. Looking toward 2023, despite the larger macroeconomic noise, we remain focused on our unit growth plan, 4,000 systemwide shops in 10 to 15 years, and we feel that our four-wall model will support our long-term ambitions. In closing, I'd like to thank our operators and our franchisees, who are at the frontline of executing this every day and all of the people behind the scenes supporting these efforts. The beauty of this business is it flexes and changes with the times. Over the last 30 years, we have moved and adjusted, and over the next 30 years, we will continue to do the same thing. As a team, we maintain a long-term focus and are excited about our future. Now I'd like to turn the call over to Charley to review our financials.
Charley Jemley, CFO
Thanks, Joth. Here's a quick recap of Q4 financial results. Quarterly revenues surpassed $200 million for the first time, going up 44% compared to the same period in 2021. Adjusted EBITDA more than doubled compared to the same period in 2021, and total company-operated shop contribution margin was 28.5%, up 940 basis points year-over-year. Recall that this contribution margin of 28.5% includes 220 basis points of pre-opening expenses. In Q4 2022 for the first time since launching the Dutch Rewards loyalty program in early 2021, we were in a position to recognize breakage. In late 2021, we notified customers that points earned in 2022 onward will expire in six-month increments and that points earned prior to 2022 would be grandfathered with a one-year expiration. Going forward, given this backlog is behind us, we expect expirations will be more modest. In terms of the impact of breakage, note the following. Q4 company-operated shop contribution margin was approximately 210 basis points higher as a result of the breakage recognition compressed into the quarter. For the full year 2022 results, company-operated shop contribution margin was $4.9 million higher as a result of the 2021 expirations only, with an impact of 50 basis points. Let's move on to new shop performance. When we assess performance, a key aspect is achieving a company-operated shop contribution margin of 30% in the second year of the shop's operations. Despite all the headwinds we faced in 2022, we are on track with this objective. We have 172 company-operated shops in the class of 2019 and after that we consider mature, and they have reached margin efficiency and moved past their initial pre-opening expenses. In 2022, these shops achieved a 29.4% contribution margin, which, as a reminder, includes all the disruption we discussed earlier this year. Please refer to the supplemental presentation we posted on our investor website for more details on margins in our newer shops. While we are moving very quickly, the reliability of new shop margin performance reinforces confidence in our decision to steadily increase the pace of company shop development. The combination of a solid four-wall model and a growing company-operated shop base positions Dutch Bros to fund growth with cash flow from operations within a few years. Because of the extensive fortressing, reported comps are weighted down by sales transfer and we are mindful of that as we assess the underlying revenue performance of the business. That said, it is still important that we walk you through the metrics. Q4 systemwide same shop sales decreased 0.6%, which is better than our expectations given the challenging lap we had from strong results in the prior year. The challenging lap from the prior year of 10%-plus comes in part due to less impact from Omicron disruption relative to many of our peers. It is notable that Q4 2022 same shop sales were 16.2% higher than 2019's pre-pandemic levels. The negative 0.6% result includes an estimated 130 basis points of impact from sales transfer, well within the expectations of our fortressing strategy. Company-operated shops experienced an estimated 160 basis points of sales transfer. At the current pace of development, a modeling target is a range of 200 to 300 basis points of company-operated sales transfer impact for 2023. Now moving on to recap 2022, 133 new shops opened on top of 98 in 2021, revenue grew 48% driven by the strength of new shop openings and positive same shop sales. AUVs for our mature shops opened since 2019 were $2.05 million, and our estimates of going-forward annualized average weekly sales for the 2022 class are currently $1.8 million. We aim to create a diverse and well-positioned portfolio. AUVs of shops in some markets will be higher, particularly when the pace of development is slower due to local market conditions, but also lower in some cases when we can move opportunistically and execute our fortressing strategy if advantageous local market conditions are in place. In 2022, we generated $739 million in revenue and $91.2 million adjusted EBITDA. We are pleased with this outcome, having successfully navigated so much uncertainty in 2022 as rising inflation took a bite out of our company shop margins, particularly in the first half of the year. 2022 is really a tale of two halves. While both halves had similar revenue growth, adjusted EBITDA declined 32% in the first half but recovered to grow 66% in the second half. The first half was marked by rapidly rising costs. For example, dairy rose 25% year-over-year and it makes up about 30% of our ingredients basket. We elected to take a measured approach to menu price increases during the year, maintaining a loyal and healthy customer base, who views us as a good value for the money as paramount. We respect the need to deliver a profitable model, but short-term margin compression was something we were willing to absorb, particularly given we entered 2022 with healthy margins. In the second half of the year, we began to close that gap between the cost environment we experienced and menu prices. Adjusted EBITDA grew 66%. Cash flow from operations also quickly rebounded in the second half. We achieved $60 million for the full year, generating more than 70% of that or $43 million in the second half. In our franchising segment, gross profit moderated to $15.6 million compared to $17.7 million in the same period last year. In Q4 2021, we recovered approximately $2 million of bank fees from Dutch Rewards transactions paid by Dutch on behalf of our franchisees to expedite bringing the program to market. Excluding that Q4 2021 item, profit in the quarter was flat to the prior year, indicating that we have now stabilized the profitability of this segment after absorbing inflation in the first eight months on the products we sell to our franchisees. Shifting now to SG&A. For the quarter, SG&A was $50.6 million and includes $10.7 million in stock-based compensation. Adjusted SG&A was $38.1 million and continues to decline as a percent of revenue to 18.9% for Q4 2022 compared to 20.1% in Q4 last year. We expect continued SG&A leverage going forward as anticipated revenue growth outpaces the growth in costs associated with people and infrastructure investments. Please refer to the supplemental slides for a reconciliation between SG&A and adjusted SG&A. Now a few comments on the health of our balance sheet liquidity. At year-end, we had $191 million of net debt, which was about two times adjusted EBITDA. This was an increase of $39 million in Q4. We had $287 million of undrawn liquidity on our $500 million credit facility. Our balance sheet remains well capitalized and capable of supporting growth. It's our objective to grow quickly, scale the business, and exit the decade debt-free or shortly thereafter, our long-term financial projection to support this outlook. Finally, on to 2023 guidance. For the full year 2023, we're issuing the following guidance. Total system shop openings are expected to be at least 150, of which at least 130 shops will be company-operated. Total revenue is expected to be in a range of $950 million to $1 billion. Same shop sales growth is estimated to be in the low single digits. At this point in time, our objective is to avoid taking any additional menu pricing in 2023. Despite an uncertain consumer environment and our present desire to avoid additional pricing, we are cautiously optimistic for 2023, estimating adjusted EBITDA to be approximately $125 million. Please note, this includes approximately $8 million in proactive investments in labor related to increases in wages and federal minimum wage markets. This is in addition to approximately $11 million of increased labor expense from legislative wage increases in non-federal minimum wage states. Our wage structure indexes to local market conditions. Capital expenditures are estimated to be in the range of $225 million to $250 million, which includes approximately $15 million to $20 million for a second roasting facility that we project will open in 2024. Thank you. And now we will take your questions.
Operator, Operator
Your first question comes from David Tarantino with Baird. Please go ahead.
David Tarantino, Analyst
Hi. Good afternoon. Charley, I was interested in learning a little bit more about the factors underpinning the profit outlook for 2023, so I know you mentioned the labor investments, but could you help us frame up what you're assuming for contribution margin at the shop level and, I guess, separately or secondly, I was hoping that you could maybe elaborate on why you're not pricing against some of that inflation at this point? Thanks.
Charley Jemley, CFO
Hi David. Thank you. So on the shop contribution margin, with all the puts and takes, we expect that to be flat. We have wage investments as I noted in my comments, with two big items that will essentially be offset by the rewards refresh benefits we talked about. There are other inflationary costs as we absorb the full year of those things that happened in '22 and '23. And at this point, we are not pricing in any big movements in our commodities at this stage. And then let me get to the second part of your question. So, I think we're all aware of where our traffic trends are right now and what the consumer has been through. And at this point, given that we just refreshed rewards, we take prices and typically in two windows in the spring and the fall. We just made the rewards move; it wouldn't be appropriate for us to make a pricing move at this stage. And also just looking at where our consumer is, we'd like to be able to absorb all these changes without rising prices in '23 and let the consumer environment settle down. It's really important that we maintain a good value for money position in our business and not look at that on a short-term basis.
David Tarantino, Analyst
Got it. And then on the rewards program change, I guess, can you elaborate on what the financial impact of that would be? Presumably, it would be less of a discount, but you mentioned some opportunities to reinvest behind that. So I guess, how should we think about the P&L implications of that move?
Charley Jemley, CFO
So it starts out as lower discount promotion costs as we will bring the cost of the program back to what we originally intended it to be given we've had a lot of menu price increases, so points earned will go lower as we mentioned from five points to three points; that has an effect on discounts going forward. And then, Joth talked about in his comments that what we'd like to do is really move to the next phase of our rewards program and do more targeted incentives and offers to customers to get them to try different things and experience new things, and we're going to spend a fair portion of that back in incentivizing particular things for customers.
David Tarantino, Analyst
Got it.
Charley Jemley, CFO
It's also important to note, David, that we announced this today, but you won't feel the impact of it until the second quarter onward.
David Tarantino, Analyst
Yes, understood. Thank you very much.
Charley Jemley, CFO
Thank you.
Operator, Operator
Next question, Sharon Zackfia with William Blair. Please go ahead.
Sharon Zackfia, Analyst
Hi, thanks for taking the question. I guess first question, could you give us an update on initiatives that you have to kind of improve efficiencies or speed within the box and maybe unlock some increased throughput? And then secondarily, Charley, I think you are running maybe 10% of price in the fourth quarter; maybe I had that mistaken, but it just seems like you'd be carrying more price residually into 2023 is in the low single but I think it was in the press release. So can you kind of walk us through what price you rollout when this year? That would be helpful. Thank you.
Charley Jemley, CFO
Yes. So the price rollover for the full year of 2023 is approximately 4% that will carry over. There's also... Sorry, Sharon, if you're trying to map to the low single-digit comp number, you've got that we guided to, you’ve got positive pricing rollover, but you've also got the sales transfer piece to factor in.
Sharon Zackfia, Analyst
Thanks for that.
Joth Ricci, CEO
The list of operational improvements is extensive, but let's highlight a few key points. We have discussed capital systems and the implementation of tap systems at Dutch Bros. We began testing in a single location in the fourth quarter of 2022, and we have now opened five new locations in Texas, specifically testing in San Antonio and another in Dallas. We anticipate improvements in all aspects from production to delivery, back-end inventory, the speed of drink-making, and the overall quality of the product as it reaches the customer. We believe each of these areas will show enhancements, and we expect to share insights on metrics related to the tap system implementation in the next quarter. Another significant aspect is our rewards program, which recently underwent changes to our point system. A crucial opportunity for us lies in the Dutch Pass program, encouraging customers to load more dollars into their accounts. By increasing the number of users who pay with Dutch Pass, we can eliminate unnecessary steps in the transaction process, allowing for a quick QR code scan and a smoother experience at the register. These two main initiatives are expected to have a significant impact on the business both in the short and long term. Additionally, the team is actively working on several smaller operational improvements to enhance speed.
Operator, Operator
Next question, Chris O'Cull with Stifel. Please go ahead.
Chris O'Cull, Analyst
Hi, thanks, good afternoon. Charley, you pointed out in your presentation that last year was a tale of two halves, so I was hoping you could maybe help us understand how we should think about the cadence of comp and shop margin performance as you kind of progress through the year?
Charley Jemley, CFO
Yes. So, comp will be more front-loaded as we rollover, as we carry over the pricing from 2022 for the full year, 4%, it will be zero rollover by the fourth quarter. If you think about the cadence of margin when you're making those labor investments immediately that we mentioned, so you will feel the margin impact of that on a sequential basis in Q1; then the rewards refresh comes in to create some recovery around that, and margins will normalize from the second, third, and fourth quarters. What I think we're going to see in the business is a more normal seasonality curve to our margins from Q1 to Q4 being our lowest seasonality while Q2 to Q3 being our highest seasonality. 2022 didn't follow that shape because of all the inflation in the first half and then as we caught up on prices in the second half.
Chris O'Cull, Analyst
Okay, that's helpful. And then I believe you said you're assuming new stores opened at $1.8 million in annualized sales, but I think the stores have been opening at higher levels. So I'm just curious why not build in a higher volume into the projection. I didn't know if maybe you're seeing anything in terms of variability by geography that caused you to be more conservative.
Charley Jemley, CFO
Yes, no, it wasn't that we're assuming $1.8 million going forward. It was that our recent class of stores was averaging $1.8 million, our latest class of 22 stores, whereas the prior classes average about $2 million. So that was the distinction we made in our comments.
Chris O'Cull, Analyst
Okay, sorry I misheard that. Thank you.
Charley Jemley, CFO
With actual results.
Operator, Operator
Next question, Andrew Charles with Cowen and Company. Please go ahead.
Andrew Charles, Analyst
Great, thanks. Joth, can you talk about how you tested the Dutch Rewards accrual changes, just given how young the program is? Just kind of curious what gives you confidence that the changes won't drive a sour customer reaction?
Joth Ricci, CEO
I believe that since we began this program, we have been on a journey. The first year of Dutch Rewards focused on launching and understanding consumer preferences. In the second year, we dedicated a lot of effort to testing and iterating, analyzing market responses and individual customer reactions to points. We ran various promotions that offered different point levels and found that, in many instances, lower points led to similar behaviors as higher points. For year three, we are looking to execute and refine our approach. We're now leveraging insights gained over the past couple of years and analyzing all the data to confidently transition to the five to three program. We believe we have retained the free drink offer that customers already have with their points, and we are moving towards a price-adjusted program. We are not overly concerned about this change and feel it is fair to both the customer and the original program we introduced in 2021.
Andrew Charles, Analyst
Got it, that's helpful. And my other question, Charley, is for you, just with the 2023 adjusted EBITDA guidance, it might be semantics, but the slide callout at least $125 million in adjusted EBITDA in 2023. Totally get, obviously the labor investments you guys are being proactive on, but just trying to think about it if I bridge to consensus, where is perhaps the conservatism in guidance within just the slide pointing at $125 million plus? Is it around those flat shop margins? Is it around potential G&A? Is it sales based on your date performance to just trying to better understand how much of this is transitory versus just what it means to be growing in new markets? Thanks.
Charley Jemley, CFO
Yes, some of the flex is we're not pricing in any commodity upsides. We're watching dairy prices closely. So those have come down a little bit, but we don't feel it's wise to take that to the bank until we see it set in for real. We're making about a $5 million investment in our technology platforms, all of the platforms across the business on a year-over-year basis. So that's part of the factor. And then I think you just take the additional wages that we built in, the $8 million move. That's really outside the scope of what we normally would have to do. The fact that we're being careful not to price, and you can pretty quickly walk yourself up to a number beyond $125 million and why we've been thoughtful about investing and careful about how we guide. We don't want to come back to you.
Andrew Charles, Analyst
Makes sense. Thanks, guys.
Charley Jemley, CFO
Thank you.
Operator, Operator
Next question, Sara Senatore with Bank of America. Please go ahead.
Sara Senatore, Analyst
Great, thank you very much. Quick question on the accounting for the breakage, and then I'll have sort of a more in-depth question on the new units and kind of how to think about margin returns. So just so I understand the breakage, was that a tailwind to comp? And so you sort of basically just have this top-line that has no costs associated with it and that's why it was a boost to margins? I'm just trying to think about sort of normalized margins in that context. And then on, I guess if I step back on the marginal returns to the business, CapEx is going to be a bit higher than we may have thought. You being, I think appropriately conservative on EBITDA, but new unit volumes are perhaps a bit lower than they were. I guess, is there anything that sort of structurally different? Is there any reason to think that the economics that you've talked about in the past no longer apply? Just trying to understand how much of this is transitory versus just what it means to be growing in new markets? Thanks.
Charley Jemley, CFO
Thank you. So on the rewards accounting, it does not affect comps, but to the point you made, it is in a revenue number and in the profit number. The $4.9 million, and we disclosed this in the release, is related to a lot of sign-on points and offers we gave back in 2021. So we distinguish between that. The best way to look at is the way we put it in the release for 2022 that prior year piece was about 50 basis points if you normalize for that. In terms of your question around the go-forward cost structure, no. Our objective was to get a weighted 30% cash returns on the ground lease rates. So that's the most severe return we have when we have to build the entire unit ourselves. At those $2 million AUVs and our margins, we were well in excess of that 30% return. And I think as we look at things potentially moderating, meaning the cost side going up, we saw double-digit build cost inflation, and we'll probably continue to see double to mid-double-digit inflation going forward, that will eat into some of the excess return we had in our investment thesis. But we still believe and our numbers tell us that the strong four-wall model we have, the high margins we have, are able to absorb any punishment from build costs in the near term.
Sara Senatore, Analyst
Thank you. Regarding the 1.8 versus the 2, is that due to increased infill and more new markets? Is there anything we should pay attention to in this regard?
Joth Ricci, CEO
So we are going deep, especially in Texas where we've had some opportunistic places where we can build out very quickly in one particular market. In 12 months, we opened 14 shops. So we see some of that. It's also the portfolio. It depends on the timing when shops open. Sometimes we have high-volume California and Arizona shops waiting in. In the fourth quarter, we had less of that and more of the deeper trading markets like the Texas markets we went in. So that will ebb and flow over time.
Sara Senatore, Analyst
Understood. Thank you so much.
Operator, Operator
Next question, John Ivankoe with JPMorgan. Please go ahead.
John Ivankoe, Analyst
Hi, thank you. The question is on labor, which is actually down quite a lot relative to our expectations, both on a percentage of sales and per operating week basis. Could you talk about what if anything changed in the fourth quarter? Is that your go-forward model for labor? I understand traffic would have been down, but did you find some efficiencies on labor in the system in the fourth quarter that really do make sense going forward? And also, I'd like to ask about hourly turnover and also hourly tips as well if I can. Thanks.
Charley Jemley, CFO
Yes. Hi John. I see the same numbers you're looking at. In the fourth quarter, we experienced an improvement in labor by about 450 basis points compared to the same period last year. There are three main factors contributing to this. First, we have implemented significant pricing strategies, and if you examine our cost structure, particularly in how we manage our staffing, you'll see that our labor management supports this. We have also made concerted efforts this year to improve our staffing practices, significantly reducing overtime as we are well-positioned and adequately staffed, leading to increased efficiency and productivity. Moving forward, we expect to maintain a similar trajectory as we have enhanced our operational processes. However, it's important to note that we will be making wage investments, so while you may see a decrease from the figures we reported in Q4, anticipate an increase in the first quarter due to the wage adjustments we've announced.
John Ivankoe, Analyst
And can I ask about hourly turnover and also the level of hourly tips?
Joth Ricci, CEO
Yes. Hi, John, what's your question?
John Ivankoe, Analyst
Hourly turnover year-over-year. I know at one point it was going up and tips were actually going down at one point for the employee level. If those are stabilized or if that's still something that you're looking at?
Joth Ricci, CEO
Q4 turnover is down about 300 basis points from Q3, and we've stabilized in the mid-70s range. Interestingly, November and December saw the lowest monthly turnover we've experienced in the past 19 months. We are continuing to notice a strong labor impact across our shops, but I consider this a positive indication. From a tips perspective, we believe that tips are stabilizing, and non-federal minimum wage states have shown a slight increase in recent quarters. A lot of the tip fluctuations we've seen appear to have settled down in the fourth quarter, and we are closely monitoring this as we enter 2023.
John Ivankoe, Analyst
That's great. Thank you.
Operator, Operator
Next question, Jeff Farmer with Gordon Haskett. Please go ahead.
Jeff Farmer, Analyst
Great, thank you. On the labor investments and mandated minimum wage increases, I just have a couple of follow-up questions. So the first would be what level of sort of blended wage inflation does this equate to in 2023 across sort of the two increases?
Charley Jemley, CFO
I can talk in margin points. I don't have in front of me the exact percentage increase, but it's about two margin points. The combination of both of those will be about two margin points.
Jeff Farmer, Analyst
Okay. And then just again thinking forward on this theoretically, you'll find some mandated minimum wage increases appearing again in 2024. So is it just a dynamic where we're going to see more of these increases as we move forward? Or is this a specifically unique year in that you guys decided to actually raise wages in the federal minimum wage states, which again, that's at your own discretion? So it's just 2023 going to be an outlier year in terms of the size of wage rate inflation? Or is there more to come in terms of what's mandated out there in 2024?
Charley Jemley, CFO
So separate the two things which you have done, kind of in your question, which is the proactive thing we're doing with wages in federal minimum wage states. We wouldn't expect that to continue beyond this year. So, there's always going to be wage escalation, but that sharp move we made is kind of a one-time move. The mandated wage escalation is going to continue to your point; it's going to continue onward in a similar fashion. The unusual situation, I would say, against that is typically we would have used pricing moves to pay for part of that, and because of other factors we talked about, we're really trying to get through '23 without having to take our prices up. So going forward, '24 and '25, you would expect us to absorb some of that through normal price increases and productivity.
Jeff Farmer, Analyst
Okay. And then just one more follow-up. I believe this one will be a little bit more straightforward. So you guys had said on commodities, not much movement, I think was the quote. It's been touched upon on this call, but exactly what does that mean for dairy and coffee in terms of inflation for both of those commodities for you guys in 2023?
Charley Jemley, CFO
The slope of the increase has definitely slowed down, but if you reflect on '22, the sharp rise in the first half, we are planning a full 12 months of those higher costs first of all, right, versus less than 12 months impact in '22. We are seeing dairy come down, but it's not been there long enough for us to really take that to the bank, and dairy is the biggest piece of this, frankly. So that's our view: annualizing over a partial year of inflation is a reality for us. Hope is not a strategy, but some hope that dairy moderates downward and we get some upside out of that.
Jeff Farmer, Analyst
And I apologize, just one more follow-up. I appreciate you guys sort of giving me some latitude here, but you meant this is the last one; you mentioned a $5 million technology investment. I'm just curious if that shows up as capitalized or as an expense? How does that show up on the P&L, the balance sheet, where are we going to see that $5 million tuck investment?
Joth Ricci, CEO
In the SG&A line.
Jeff Farmer, Analyst
Okay. I appreciate it. Thank you.
Operator, Operator
Next question, Nick Setyan with Wedbush Securities. Please go ahead.
Nick Setyan, Analyst
Thank you. I wonder if you could just break down the transaction growth versus average check in the quarter?
Charley Jemley, CFO
Yes. So here's the decomp on Q4 same-shop sales. I mentioned negative 0.6% reported. I'll use some round numbers to make it easy: plus 11 on menu pricing, minus 1 from estimated sales transfer, that was actually 130 bps, minus 1 from higher discount promo costs, 2% mix shifts. Notable, we didn't see any sizing trade-down; it's just a mixture of goods sold. And so what's left is the 7% underlying negative traffic. Q3 was negative 3. So on a reported basis, Q4 was more negative traffic, but we also want everybody to understand we're lapping an amazingly good Q4 2021, which was our best quarter in 2021.
Nick Setyan, Analyst
Yes, that's very helpful. Thank you. And just given the really solid January and February to date data across the industry that we're seeing in terms of the top-line trends, any sort of early commentary around how Q1 has started?
Charley Jemley, CFO
One important aspect to note about Dutch is our response to various virus events. We mostly remained open during the winter outbreaks of 2021 and 2022, staying fully staffed and operational. Therefore, much of the rebound data that others may be experiencing does not apply to us, as we did not experience the same outages. Our comparisons reflect this stability since we didn't shut down during those times. We have encountered some adverse weather effects, particularly on the West Coast in December, which may impact us. Consequently, we will not experience the Omicron bounce that many of our competitors anticipate in the first quarter. As we approach March, we expect to navigate through a period that was challenging for us last May, and we might see improved sales performance in the latter half of March.
Nick Setyan, Analyst
Okay, that's very helpful. And then in terms of just the change in the loyalty, any way to quantify the lesser discount going forward starting in Q2?
Charley Jemley, CFO
Yes, so it'll ramp. It will start to flow through the P&L in Q2 and build in and peak in Q3. So we're looking at about 100 to 200 basis points of margin improvement that will come through that. Now, we talked about investment; we're using, we're paying for that with this benefit, right, and not taking price.
Nick Setyan, Analyst
Understood. And then just last question, a clarification. When you said, and I think you said that again earlier in the call, in terms of pay for the labor investments with this change in the loyalty program, should we take that as across the entire company margin or labor could be flat year-over-year?
Charley Jemley, CFO
Well, there's two labor pieces, right? So there is the wage floor piece that we talked about, the $8 million, and there's $11 million in minimum wage. I would say that, if you take the rewards refresh, the value of that left to spend back, we're going to do on it; we're still not going to cover that wage investment.
Operator, Operator
Your next question comes from Gregory Francfort with Guggenheim Securities. Please go ahead.
Gregory Francfort, Analyst
Hi, thanks for the question. I have two. I know I should only have one, but the first is whether you have a rule of thumb for how much G&A should grow as a portion of revenue in '23 and the following years as we consider that. The other question is about Christine's role; what responsibilities do you think she will take on and what do you expect her to focus on in her early days as President? Thanks.
Charley Jemley, CFO
Yes, thanks for that. This is Charley. So what we're trying to do right now is drive that adjusted SG&A number and you can see the reconciliation in our release down below 18% in 2023. When we went public in '21, that number was almost 24%, so thinking about it, right? We want to drive that percentage down, which means, of course, we want G&A to grow slower than the rate of revenue. Ultimately, how slow it grows down the road, we don't want to get locked into that, but do want to lock into driving that number below 18% in '23.
Joth Ricci, CEO
And I think it's a great tie-in to the question about Christine because I think that for us, Christine will run all the day-to-day operations of the business. So everything from our retail team to marketing efforts to our operating team to people systems and really executing our AOP. The thing that we looked for in Christine, and we really feel like we landed the best candidate in the country for this job, was we wanted somebody who could look out, who has been through a larger operating business like this and be able to build our systems to scale. So the number that Charley speaks to is a key component to how we will continue to grow and execute the business at scale. We look at some of our other peers in the industry and understand some of the numbers that we'd like to get to long term. So Christine’s ability really to come in, look at the business at a big picture, lead our team so that we can be big and small at the same time are important aspects. So really executing every day, driving the rewards program, building out AUVs, hitting the new shop program, driving our operating and logistics systems behind the scenes to be able to serve across 4,000 locations long term, and then building people systems to really operate it with an employee base that runs between 50,000 and 75,000 people. I mean, those are all things that we will rapidly be able to execute as we follow our growth plan correctly, and she has got the experience to do that.
Gregory Francfort, Analyst
Thank you.
Operator, Operator
Thank you. I would like to turn the floor over to Joth Ricci for closing remarks.
Joth Ricci, CEO
Thank you. For more than 30 years, Dutch Bros has been in the business of building and nurturing relationships, and we have all the building blocks to remain a successful and enduring company, while creating real value for our shareholders. These attributes include a powerful authentic brand, strong people systems that drive company culture and fuel our shop growth, the highly engaged customer following, customizable and uniquely curated beverages, the highly consistent and highly attractive unit-level economics, a portable model that is successful across geographies, the strong and well-capitalized balance sheet that provides ample liquidity, and an engaged co-founder and an experienced leadership team. And for our investors, thank you for your time and, as always, the continued support of Dutch Bros. Thank you, everybody.
Operator, Operator
This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.